When President Suharto stepped down on May 21, after weeks of unrest,
Indonesia heaved a sigh of relief. But those sighs are giving way to
gasps of pain at his legacy of economic woe.
Growth is out of the question any time soon. The economy shrank
6.2%
year-on-year in the first quarter, according to official figures. In the
confusion that still reigns in post-Suharto Indonesia, no one knows just
how bad 1998 might get; many now foresee a contraction of well into
double digits.
The economic clouds have steadily darkened since January. Spiralling
prices fuelled social unrest, and political uncertainty added to the
gloom. A sagging rupiah, poor agricultural output (caused by drought)
and a virtually paralyzed distribution system led Indonesian economists
to estimate that in May, annualized inflation hit 60% -- three times the
January figure of 20%.
The rupiah seems stuck in a rut. On June 1, it was trading at
11,750
to the U.S. dollar, down 49% from 6,000 on January 2. The fall has
forced Bank Indonesia, the central bank, to keep interest rates high --
58% in May, up from 30% in January. The bank hopes high rates will stem
inflation and keep the currency from collapsing, but borrowers cannot
afford these rates. "There is no economic activity," sighs an Indonesian
banker.
This standstill has increased joblessness. In May, 8 million
people
were unemployed out of a population of about 200 million. That's twice
as many as were out of work at the start of this year, and conservative
forecasts put the figure at 20 million by year-end.
Tim Condon, senior economist at Morgan Stanley Dean Witter,
worries
that rising unemployment and the destruction caused by the recent riots
will force Jakarta to raise subsidies, which already take up 3.5% of
GDP. It will need to borrow from abroad and sell state-owned assets to
replenish its coffers. It needs money as fast as possible to prevent
foreign reserves from drying up and thereby driving the rupiah down
further.
Such a fall would make imports, and food subsidies, costlier,
and in
turn put yet more pressure on the reserves. Currency dealers in
Singapore say they stood at $2 billion in May, compared with about $17
billion in January.
In addition, Jakarta cannot expect to sell too many assets to
foreigners unless the economy shows signs of recovery. "In this
environment no one will invest in Indonesia," Tenri Abeng, minister of
state enterprises, said recently.
Condon believes Bank Indonesia will be left with no option but
to
print cash to supplement income from asset sales and foreign borrowing.
But that will send inflation spiralling even higher.
Indonesia will take years to get out of this quagmire, analysts
say.
"You have to write off 1998, and without policy credibility being
established quickly, 1999 can't be salvaged either," predicts Manu
Bhaskaran, managing director of SocGen-Crosby Research in Singapore.